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What expenditure is excluded from the tax shelter rules?

Last updated 9 December 2019

The following prepaid expenditure is excluded from the application of the tax shelter rules:

  • premiums for building insurance, contents insurance or rent protection insurance
  • interest on money borrowed to acquire:
    • real property or an interest in real property
    • shares listed on an approved stock exchange, or
    • units in a widely held unit trust which has at least 300 beneficiaries

provided the arrangement is conducted at arm's length and that you have or can reasonably expect to obtain rent, dividends or trust income. Additionally, you must not have obtained and will not obtain any other kind of assessable income (except a capital gain or insurance receipt) from the arrangement.

Also specifically excluded from the application of the tax shelter rules are:

  • certain expenditure that is an allowable deduction under the infrastructure borrowing rules
  • expenditure incurred under a contract (requiring prepayment for something to be done under the agreement) entered into before 1.00pm (by legal time in the ACT) on 11 November 1999 that you cannot avoid by your own actions
  • expenditure under an agreement which, before 1.00pm (by legal time in the ACT) on 11 November 1999, had obtained or had applied for and later obtained a favourable ATO product ruling or
  • any prepaid expenditure which is excluded expenditure; that is, an amount below $1,000, an amount required to be incurred by a law or a court order, or an amount of salary or wages.

Note: If you incur prepaid expenditure that is not subject to the tax shelter rules because of one of the above exceptions, your deduction must be determined in accordance with the other rules explained in this publication.

Summary of rules

  • Certain prepaid expenditure incurred under a plantation forestry managed agreement is subject to a 12-month rule. For more information, see chapter 3.
  • If you invest in a tax shelter arrangement, you need to be aware that the tax shelter rules for prepayments may apply to limit your immediate deductions. The tax shelter rules apply in the same way to all taxpayers.
  • If you prepaid expenditure under a tax shelter agreement for a thing that will not be wholly done within the expenditure year and it is not covered by one of the exceptions listed above, you cannot deduct all of the expenditure in the income year in which it was incurred. The deduction must be apportioned over the eligible service period or 10 years, whichever is less.
  • An agreement in respect of a tax shelter arrangement is one that covers any activities that relate to the arrangement, including those that give rise to deductions or assessable income. For example, if you invest in a tax shelter arrangement and prepay interest on a loan from a 3rd party to pay management fees for the tax shelter, the prepaid interest on the loan would also be subject to the tax shelter rules.